On November 15, 2021, President Biden signed into law the bipartisan $1.2 trillion Infrastructure Investment and Jobs Act (IIJA) which had previously been approved by both the Senate and the House of Representatives. The act included several tax provisions including ending the ERC early, requiring Cryptocurrency information reporting, and an extension on interest rate stabilization for pension smoothing.
If you are confused about what tax provisions are in the infrastructure bill, and the distinction between the IIJA and the Build Back Better Act (BBBA), you are not alone. Originally, many in Congress pushed for IIJA and BBBA to be connected and passed together. However, due to the BBBA being held up, some tax provisions were included in the IIJA, which was passed yesterday.
The focus of major tax provisions on the Biden Administration’s agenda will still be included in the BBBA, which is still under consideration by the House and the Senate. The BBBA as it stands now is a $1.75 trillion bill with many of the original tax proposals being reduced, delayed, or eliminated. We are keeping a close eye on the BBBA developments and will keep you updated on changes that will affect you and your business.
The BBBA is still up in the air but we can give you clear guidance now on the IIJA. The act contains significant federal investments in America’s infrastructure over the next five years and several significant provisions affecting taxpayers.
Employee Retention Credit
The IIJA terminates the Employee Retention Credit (ERC) for most employers. This likely will require companies that funded the fourth quarter credit by reducing employment tax deposits to repay these amounts. It is unclear whether the IRS will impose late deposit penalties and interest; normally, the IRS claims it lacks the power to abate interest, but it can abate penalties based on reasonable cause. The IRS will provide guidance on a penalty waiver procedure for this situation.
The ERC will not be allowed after the third quarter of 2021 for employers other than Startup Recovery Businesses. A Startup Recovery Business is defined as an entity that began conducting business or trade after February 15, 2020; had average annual gross receipts less than $1 million; and does not otherwise qualify for the ERC either by full or partial closure or by a significant decline in gross receipts requirements. For the fourth quarter of 2021, a company that would qualify under prior rules should be eligible if it can otherwise satisfy the Startup Recovery Business rules.
Brokers to Report Digital Asset Transfers (Cryptocurrency)
The IIJA contains a provision for any broker to report digital asset transfers, generally known as cryptocurrency transactions. “Broker” is broadly defined in the IIJA to include those who regularly provide services in connection with the transfer of such assets. Failure to report digital asset transfers would subject the taxpayer to civil penalties without reasonable cause.
This provision applies to returns and statements that must be filed after December 31, 2023. The Treasury Department will issue detailed guidance on this provision, and the delayed effective date indicates there may be legislative changes to this rule over the next few years.
Extension of Interest Rate Stabilization Table for Pension Smoothing
Many companies follow the practice of “pension smoothing” which allows the use of higher future interest rates to establish their future pension liability. The IIJA extends for another five years the interest rate stabilization table issued within the Internal Revenue Code, which was scheduled to expire at the end of the 2025 plan year. This rule is expected to generate higher tax revenue by reducing the level of current contributions and, correspondingly, a reduction of deductions in determining taxable income.
Contribution to Capital Rule Modified
Certain regulated public water and sewage disposal utilities may exclude from income contributions made to the capital of these corporations. This rule is effective for contributions made after December 31, 2020, and also provides certain automatic extensions of filing deadlines related to federal disasters, including “significant fires.”